So you want to build a SaaS. You think it can solve a problem that other people are having. They might even pay you money for it.
Now all you need is an audience. A market for your product. An audience to sell to — a bunch of people that like your product enough to enter their payment information.
This audience should be large enough to allow you to build a sustainable business. You will likely have some competition eventually.
This audience should also be small enough not to be generic. You want to sell to a defined group of people, not “everyone.”
A bootstrapped business works best when it starts out in a niche. Most companies will do really well by just staying there. Some expand into other markets. But that initial audience is one of the most important things to carefully select when you start a business.
I’ll share the strategy we used for FeedbackPanda when we started out. It allowed us to focus on a clear niche and grow the company from zero to over $50k in MMR before we sold it two years after we started.
When we started FeedbackPanda, we had noticed a painful problem. A problem we experienced for ourselves. So we solved it for ourselves. We then saw that other teachers, just like Danielle, could benefit from our solution. They had the exact same problem. We knew our first version already solved the problem well. That’s why we knew other teachers would pay for it.
But were there enough teachers? And would they be willing to pay? Did they have the same need?
In short, we needed to figure out if our combination of problem and solution had an addressable market. In my experience from FeedbackPanda and the startups I have worked at before, this can be determined by asking the following questions.
Have we found a painful problem?
You can solve a lot of problems. Big problems and small problems, invisible problems and obvious issues. Not all solutions will have an addressable market. People are willing to pay for some things, and they won’t even consider spending money on others.
They will spend money on their most critical problem. The closer you are to that one core issue customers are having with their job or activity, the more likely you are to capture a large part of that market with your solution. For bootstrapped companies in particular, this is very important, as you can’t just easily add more products or work on different things at the same time. Having the problem figured out from the beginning gives you initial traction that will guide your future efforts.
Is the audience large enough?
Your audience will have to be big enough to sustain your business. It will likely also have to support competitors, as any successful business will attract competition.
Determining the size of our audience is a rather work-intensive task, but absolutely required before you decide to invest your time in starting a business in a market. It boils down to doing the research and asking subject matter experts in the field about the current size and the growth trajectory. If you think that you can make a good living with whatever business model you decide to use, the niche is right for you. If there are not enough people, widen the niche by adding adjacent groups to your audience and see if you can adjust the problem (and your solution) to serve those people too.
Is the audience small enough?
Contrary to popular belief, I think that for a bootstrapped company, in particular, some markets can be too big. Some audiences are too generic, some industries too vast for a great niche to exist. At least, in the beginning, you should have a clearly defined niche. As a bootstrapped entrepreneur, you will reach out to customers, be in direct contact. For that to work, you have to be able to find the right people. And if there are millions of people in an industry, your chance of finding the right ones go down significantly. Find the subject matter experts will be almost impossible at that point.
If you find that your audience is too general, try adding constraints. If you’re looking at teachers as your market, for example, make it teachers who teach math. Problems change, they become more clear, and solutions become more focussed. Math teachers talk to each other. Math teachers in K12 talk to other math teachers in K12. The smaller your audience, the more it has built-in network effects.
Can they pay? Will they pay?
Sometimes, you will be serving companies that have a budget for what you offer. Other times, you might help a currently underserved segment of a low-wage industry. The capacity and willingness to pay will be very different between those two.
While it is enticing to go for the big guys with the massive budgets, you will encounter a lot of competition there. The willingness to pay is there, but you will have to work hard to make them switch vendors or justify another expense. They will also be hard to retain, as they are capable of changing vendors quickly in such a crowded field.
Serving a currently underserved market comes with the opposite problem. There won’t be much competition, but people are not used to paying for solutions. They often have scraped by using their own tools built on Excel or Google Sheets. You will have to spend more time convincing people that your solution will provide substantial value before they grab the credit card. Once previously underserved customers commit to paying, they will be your customers for a long time. You can build a lot of goodwill from serving such a market, and it will create a lot of value for your company.
At FeedbackPanda, we have had the opportunity to serve such an underserved market. We still have customers from when we first launched the product, and word-of-mouth marketing was our only channel of marketing for the longest time. Truly loyal customers who felt nothing but appreciation for being finally served. That allowed us to ask them to talk about is in their communities, which they did to significant effect.
If you have found a painful problem, a niche audience that is both small and big enough for your business, and made sure they are willing to pay for your solution, you have found your audience. You can go and build out your product and marketing strategies for that market now.
There are a few more things to consider that are great to have in a market, but are not important enough to be a good reason to not go into a market when they’re missing.
If your market has adjacent product opportunities, that will give you a chance to think about future products you can sell. For our teacher market, where we focussed on solving their productivity problems, one could image to offer additional products that engage the other issues that self-employed teachers might have, such as scheduling or tracking their invoices. To know that these issues are mostly unsolved as well allows you to think about where to expand the business when it becomes successful.
You should think about how easy it will be to scale your business in that market. Most of the time, your market won’t grow enough to keep your business growing as a side effect. You will need to broaden your audience. Knowing that there are untapped groups and customer segments will make this a strategy you can keep in the back of your mind. For our business, it was knowing that while we were serving the teachers for several online English schools, there were hundreds of other schools. They were both already in the market and popping up all over the place. We would then just add support for more of those to increase our own growth rate.
Knowing if you need to focus more on sales or on marketing is very important. Some markets require you to reach out to buyers individually. For others, a good and well-targeted marketing strategy might mean you will never have to talk to a single customer before they subscribe or purchase. Being aware of how this will develop over time is essential to focus on what matters.
What are good markets for bootstrapped SaaS?
There are a few qualities in a market that make it the right choice for starting a bootstrapped SaaS business.
If you see that significant forces are terraforming a market, creating an opportunity where there was none before, that is a good sign. Whenever a new kind of technology or process gets traction in a field that has not seen much change before, it will create all these little points of friction. Some of them will be critical. These will be the ones that warrant creating a SaaS business.
Any newly created niches are interesting for the bootstrapped SaaS founder. The problems there will be unique, exciting, and can usually be solved quite well due to occurring in a well-defined niche. Often, these niches are not yet regulated to death, so you will have the opportunity to experiment without having to follow strict guidelines or rules. You may often be the one setting those guidelines and laying the groundwork for regulations to fall on.
Some markets, where a lot of small deciders with their own budgets make decisions, are very lucrative. These people can be convinced without needing to deploy corporate diplomacy. You can show them a product, and they will try it out, as they have no one telling them not to. Small businesses and freelancers are great audiences for a bootstrapped SaaS, as they have budgets. Small budgets, maybe, but if there is a painful problem, there will be money to fix it.
Underserved markets are a great place to start a company, as mentioned above. There will be no meaningful competition, customers will love the fact that someone is finally thinking of them, and you will get a lot of market share quickly if you find a market where scaling is not too complicated.
What are bad markets for bootstrapped SaaS?
Just as much as there are good markets to start out in, some markets will make it hard to run a bootstrapped business in.
Enterprise markets are hard to sell into for a small company, although it’s not impossible. Purchasing decisions take a long time, there are a lot of requirements even to be considered, and contracts tend the be custom and require a lot of work. Many enterprise customers won’t buy from small companies out of fear they will vanish within a few years, and that fear is not unfounded. In fact, even for your own bootstrapped business, I would recommend against using services offered by companies smaller than yourself. You will be better off looking for a market that is comprised of small to medium businesses and self-employed freelancers.
You can still sell to more prominent companies as long as their decision-makers are relatively far down the corporate hierarchy. If selling to a business involves any high-level management or even C-level approval, the market may not be for your bootstrapped company. At least not when you start out.
Monopoly markets with just a few big players will severely limit your options. You won’t have many opportunities to experiment when every sales call is critical to your survival. And as a small business, your leverage is insignificant when your customers are much bigger than you are. Aim for equal size or smaller.
Markets, where years of ruthless competition have created a large number of bottom feeders, are hazardous. In the beginning, you might be able to compete on price, but competitors with deeper pockets than you can sell at a loss for longer than any bootstrapped business. Also, customers in such a market are not the dedicated, enthusiastic, and joyful customers you want to serve.
When markets turn
Lastly, I want to talk about markets and their evolution over time. There are sure signs when a good market is starting to turn bad, and there are indicators for when previously unsuitable markets are promising to become interesting.
Good markets turn to bad markets all of the time. Most companies are well aware of that and adapt to those changes. Often, whole divisions of businesses are dropped or sold off when a market that previously worked is turning into a loss center.
Markets that are becoming hostile to businesses usually are full of very similar competitors, fighting it out over price and marginal differences. This saturation makes it hard to get into a market, and even the businesses that are already in it suffer.
Technological changes often destroy or abandon whole markets, as email did for companies selling Fax machines. There still might be a niche for that technology, but focussing on legacy does not usually promise a bright future.
When markets shrink, that is often a sign of deterioration. Whenever the number of agents and purchasers in a market goes down, business growth stalls. People cut costs, unnecessary expenses get reduced. All businesses in that market will suffer.
Attempts at regulating a market after it has been unregulated or regulated only lightly spell out trouble for the companies in it. We have seen this on a global scale with the GDPR and PSD2 regulations in Europe that affected a few markets drastically and made a lot of small companies exclude European customers out of fear for being fined millions. When rules appear, problems follow.
However, you will also find markets that we unfertile ground to sprout opportunities. This often happens in the wake of a technological or structural change. The internet made the online education market explode, and where before was very little technology in education, now there are many opportunities. New technologies create new processes. Both create new problems that did not exist before, and where no prior solutions exist.
Every market that grows in size significantly after a long period of stagnant growth is an exciting target. More people means more customers, and with a noticeable increase in headcount, new and unique problems will present themselves.
Whatever market you choose for your business, make sure you select it with confidence and the numbers to back it up. I have written about how to determine the size of SaaS markets. The more you know about it, the more you have talked to subject matter experts and long-term residents, the more you will be able to make a sound decision. Making the correct choice is vital to the success of your business. Choose wisely.